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Message From The CEO

Newsletter Specials:

Introduction to ICM.

Budget 2015-2016

Commodity Market

Investor’s Terms

REIT Regulations

An Overview of Non–Banking Financial Sector of Pakistan

News Flash

Issued for FEBRUARY, 2016

NEWSLETTER

The last few years have seen a rapid growth in size,

quality and sophistication of capital markets, because

of changes in the policy and regulatory environment,

the entrepreneurial initiatives of individuals and in-

stitutions, and the availability of trained manpower.

The continuing growth of capital markets is further

adding to the demand for well-trained professionals.

Institute of Capital Markets (ICM) is dedicated to the

professional development of capital markets and re-

search on capital markets as well as the well being of

capital markets by educating the professionals about the norms and eth-

ics being practiced in the markets. ICM has had a pioneering role in meeting the demand for educated man-

power. It is Pakistan's first specialized institution devoted to the education and updating of knowledge of

manpower for capital markets. It will provided high-quality educational standards for all types of capital

market participants; investors, brokers, mutual funds, investment banks and policy makers.

The Institute's main activities are (1) Licensing the professionals working in the capital markets by certifi-

cations. The institute’s key responsibility is to educate the professionals working in different capital mar-

kets of Pakistan through examining their knowledge in their relevant field of work; (2) Studying the latest

developments in the capital markets in order to discover whether there is such a thing as an ideal market

economy; and (3) Contributing to the development of capital markets in Pakistan. By means of these three

activities the Institute seeks to communicate its ideas to the audience both at home and overseas. The In-

stitute's research is intended, first and foremost, to be neutral, professional and practical. Rooted in prac-

tice, it aims to contribute to the healthy development of Pakistani capital markets as well as to related poli-

cies by conducting neutral and professional studies of how these markets and the financial system are reg-

ulated and organized and how they perform.

The economy is changing all the time. The Institute hopes that, by responding to these changes positively,

it can contribute to the dynamic development of the country's capital markets as well as of the economy

itself.

INSTITUTE

OF

CAPITAL MARKETS

INSIDE: Introduction to the

Organization 2

Currency Futures 3 Investment Strategies

by Age 6

Investors’ Terms of

the Month 8

Regulatory Newsflash 9

Domestic Newsflash 10

International Newsflash 11

Mr. Muhammad

Ali Khan


Introduction to the Organization

The Institute of Capital Markets (ICM), Pakistan’s first securities

market institute, has been established as a permanent platform to

develop quality human capital, capable to meet the emerging pro-

fessional knowledge needs of capital markets and create standards

among market professionals. The Institute has been envisioned to

ICM

conduct various licensing examinations leading to certifications for different segments of the capital

markets. In addition, ICM will also provide a platform for research & development, exchange of ideas

and consulting services on Capital Markets issues.


their value from the underlying exchange rate. As

the exchange rate fluctuates, the currency futures

also change in value.

Investing in Currency Futures

One can plough money into currency derivatives

by investing in exchange-traded currency deriva-

tives or in OTC currency derivatives like swaps,

forwards, etc. There are various contracts availa-

ble which differ in exchange rates and expiry so it

is recommended to choose them carefully. Inves-

tors who are willing to enter currency futures

markets must understand the types of products

they offer, their characteristic features, their risk

and return profile and their need to invest in this

market.

These contracts provide greater amount of expo-

sure to the underlying asset i.e., exchange rate, by

investing in smaller amount of capital. Forex mar-

kets, being the most volatile markets, have the po-

tential to impact the contract value. Hence, any

fluctuation in the price will have an impact on the

portfolio greatly, resulting in huge profits or loss-

es. Businesses like importers, corporates, export-

ers, etc. are exposed to currency risk and in order

to hedge their currency risk, they invest in curren-

cy futures contracts.

What are Currency Futures?

Currency futures are transferable future contracts

that specify the price at which a currency can be

bought or sold at a future date. Every country has

a currency which is designated as the legal tender

for money transactions and trade purposes. In Pa-

kistan, the rupee is the legal tender for all kinds of

transactions. However, there are some countries

which use the currency of another nation as their

legal tender.

There are dif-

ferent forms of

currency such

as bronze or

silver coins,

paper bills, etc.

which are used

in various

countries. Eve-

ry currency

has been assigned a value which depends upon the

economic growth, trade position and financial con-

dition of the country.

Currency futures are the derivative instruments

that help investors to do away with the risk relat-

ed to exchange rate. These instruments derive

Currency Futures

ICM

Intermediaries in Currency Markets

It is a platform where various intermediaries in-

teract with each other and help in completing the

transactions. It is 24-hour market so it is very im-

portant that intermediaries work together to as-

sure smooth processing and trading. Following

are the intermediaries in the market:

Regulatory Authorities

Regulatory authorities supervise the trading ac-

tivities and regulate the currency marketplace.

They issue guidelines for the market players and

also conduct irregular inspection to maintain dis-

cipline in the market.

Exchanges

Exchanges provide trading platforms for inves-

tors to trade in different financial instruments.

These institutions help the traders to place their

trades faster as these are well-equipped with

modern infrastructure facilities, trading systems,

efficient risk management and surveillance sys-

tems. Exchanges also ensure the safety of the in-

vestments.

Broking Firms

These firms provide brokerage, consultancy, port-

folio management and advisory services for its

clients. The firms charge brokerage fee for the

services offered. They have trained personnel

who have technical expertise in handling in-

vestor’s funds.

Depository

It is an institution that holds securities of inves-

tors in electronic form through a registered de-

pository participant. It also offers services related

to transactions in securities.

Clearing Corporations

These corporations oversee and help in the clear-

ing and settlement of exchange-based transac-

tions. These are also known as clearing houses.

These houses minimize chances of default risk


Currency Futures

Page 4 ICM

and ensure completion of trades.

Currency as an Asset Class

Foreign exchange or currency markets are one of the largest

markets as compared to asset class. Financial institutions,

corporates, manufacturers, importers and exporters trade in

currencies to support their financial operations. All of these

market players are exposed to currency risk on entering in-

to a trade with a foreign entity and they have been helped

by the currency derivatives to hedge their forex risk.

Forex markets are categorized by a huge variety of products

and participation by the market players. The huge participa-

tion creates trading relations between the countries which help in the growth of the economy. These

markets have huge number of transactions and round-the-clock trading which make it the most liquid

market. As a result, it is easy for a buyer to find a seller and vice versa. By investing in currencies, inves-

tors can benefit in a number of ways.

Incentive to Invest

Currency futures contracts offer leverage which gives investors an incentive to invest in these markets.

In this way, the investor gains greater exposure to the underlying asset by investing smaller amount of

capital. The market follows well-established trend which makes it more favorable for the investors. In-

vestors have an easy access to these markets due to the trading process which is less complicated and

more investor friendly. Lower costs associated with the transactions have made it easier for the inves-

tors to trade in these markets. New currency products have allowed the small investors to participate

and benefit unlike few years back when forex markets were limited to OTC platforms where financial

institutions, corporates and banks were the only major market players.


Currency Futures

ICM

An investment strategy is a plan to guide an in-

vestor’s selection based on the goals, risk toler-

ance and future needs for capital. It seems like eve-

ryone receives a piece of paycheck when they

reach their 20s. In 20’s, investors have the ability

to take high risk because they are in the accumulat-

ing phase and are able to accumulate the net worth

to satisfy short-term needs. The individuals don’t

have a number of responsibilities in their 20’s so

they should consider moderately high-risk invest-

ments because of their pretty long investment hori-

zon and earnings ability. A 25-year-old individual

who contributes 10 percent of his/her salary to an

investment plan annually will accumulate a lump

some amount by the time he/she retires. Those

people who learn to pay themselves first and invest

for growth to supersize their future paychecks are

far more likely to have a comfortable retirement.

A 30-year old individual and 40-year old individual

differ in terms of time horizon. Each must have a

substantial proportion of his/her portfolio invest-

ed in equities. The 30-year old person should have

more equity investments as he/she can tolerate

greater portfolio risk. These investors could also

differ in current liquidity needs such as children

and education expenses, tax concerns and other

unique needs/ preferences. The investors are in

the consolidating phase so they must have paid off

many outstanding debts and typically have earn-

ings that exceed expenses. The investors in this

age become more concerned with long-term needs

of retirement or estate planning although they are

willing to accept moderate portfolio risk.

When the investors reach their 50s, there are

plenty of financial responsibilities that could dent

their savings. They might be providing costly care

to aging parents while still supporting their chil-

dren. It is their spending phase when the investors

are semi-retired. In this phase, investors wish to


Investment Strategies By Age

Page 6 ICM

protect the nominal value of their savings, but at

the same time must make some investments for

inflation protection.

When the individuals reach their 60’s, they are

ready to retire and may need some current income

from the retirement portfolio to meet daily expens-

es. The individual reaches to gifting phase in which

he/she believes that the portfolio will provide suf-

ficient income to meet living expenses, plus a re-

serve for uncertainties. As it is the time when the

individual cannot take high risk so he/she should

remove all the money from the risky investment

plan and invest it in money market funds which

contain low risk and would satisfy the investor’s


short-term cur-

rent income

needs. An individ-

ual can also in-

vest the money in

other investment

options like Gov-

ernment certifi-

cates, fixed in-

come accounts,

etc. If there are

excess amounts

available in the

portfolio, he/she may decide to give it to family or

friends as gift or establish trusts to minimize es-

tate taxes.

Investment strategies change during an individu-

al’s lifetime but it is extremely important for a per-

son to make correct investment decisions when

he/she is young and ready to take high risks. At

that time, he will be able to work longer and adopt

a more aggressive stance with his/her investment

portfolio. Making investment strategy will help

them to protect their savings which they would

need after their retirement or in any unexpected

emergency.

Investment Strategies By Age

ICM

“In the long run, it’s not just

how much money you make

that will determine your fu-

ture prosperity. It’s how

much of that money you put

to work by saving it and in-

vesting it.”

– Peter Lynch



AGENT

A person appointed by a mem-

ber of a Stock Exchange to act

on his behalf for the purpose

recognized by a stock exchange

and includes a sub-broker or

head of a branch office.

BALLOTER

A person who provides services

to an issuer for selecting the re-

quired number of applicants of

public issue through a comput-

er draw.

CERTIFICATE

A certificate of definite denomi-

nation issued by the Modaraba

to the contributory acknowl-

edging the receipt of money

contributed by him under the

guidelines on the basis of ar-

rangement described.

Investors’ terms of the month

Page 8

Glossary

Absolute Privilege

Bad Debt

Capital Expenditure

Daily Collection Statement

Eligibility Criteria

Face Value

GDP

Handling Charges

DEALERS

Investment Finance Companies,

Registered Corporate Brokers

or Banking Companies who buy

commercial paper and resell to

investors.

Page 8 ICM

Issued for FEBRUARY, 2016 Issued for FEBRUARY, 2016 Issued for FEBRUARY, 2016

SECP exempted mutual funds from IFRS-10

SECP decided to exempt mutual

funds from International Finan-

cial Reporting Standards-10.

The commission has directed

that the requirements of consol-

idation under section 237 of the

1984 Companies Ordinance and

IFRS-10 will not be applied to

investment by companies in mu-

tual funds established under

trust structure. With the help of

IFRS-10, consolidated financial

statements of holding compa-

nies and subsidiaries are pre-

pared. There were applicability

issues of IFRS-10 in preparing

consolidated financial state-

ments for Asset Management

Companies. By consolidating the

mutual funds, the user’s ability

could be hindered to assess the

true and fair position of the

management. It is said by SECP

that section 237 will remain ap-

plicable to the holding company

mainly related to its asset man-

agement company but it won’t

Regulatory Newsflash

be applicable to the trust or fund

as it does not fall within the mean-

ing of subsidiary.

SECP published draft `Access to Inside Infor-

mation Regulations 2016`

Securities and Exchange Commis-

sion of Pakistan has distributed

draft “Access to Inside Infor-

mation Regulations 2016” in order

to track allegations of insider trad-

ing. The regulations have been

placed on the website of SECP to

seek public opinion and stake-

holders’ comments within 14

days. These regulations have been

formulated under the Section 131

of the Securities Act,2015 accord-

ing to which the listed companies

have to maintain record of per-

sons who have admittance to in-

side data. The listed companies

will be required to maintain a reg-

ister of details including the

names and dates of persons who

have entry to sensitive infor-

mation that could lead to fluctua-

tion in the share price of that or-

ganization. The data are primarily

related to takeovers, mergers, in-

vestments, restructuring, etc. The-

se regulations will be helpful in

tracking procedure during any in-

quiry related to insider trading.

SECP approved the Com-panies (Compliance with

Licensing Conditions) General Order, 2016

SECP notified the firms to com-

ply with licensing conditions in

exercise of the powers con-

ferred on it by Section 246 (1)

of the Companies Ordinance,

1984. The order will facilitate

investors and stakeholders who

are interested in doing business

with a specific company which

is subject to a licensing regime.

The status of compliance can be

verified on the basis of mainte-

nance of corporate record with

the office of the registrar con-

cerned. The order requires all

such classes of licensed compa-

nies to annex with their annual

returns required to be filed

with the registrar concerned

under section 156 of the Com-

panies Ordinance. The order

comprises of two schedules

which include a list of compa-

nies required to comply with

the order as well as a compli-

ance report with the licensing

conditions required to be

signed by the CEO/Directors

and countersigned by the exter-

nal auditors of the organiza-

tion.

ICM

Digital Financial Services can overcome

hurdles

Digital financial services have the ability to over-

come hurdles caused by conventional business

models. This channel is largely used by low income

persons as the branchless banking is both conven-

ient and affordable in a highly cost-efficient man-

ner for the people who have inadequate facilities.

Queen Maxima of the Netherlands said that Paki-

stan has one of the best regulatory frameworks

which provide strong foundations for taking finan-

cial inclusion to its next level. She further added

that the industry should cooperate to remove at

least some of the key stoppages to realize the po-

tential of digital financial services. The queen also

made some suggestions including availability of

smart cell phone for women, discouraging use of

excess cash and rationalizing cost of branchless

banking services. SBP Deputy Governor urged the

industry players to collaborate for integrated solu-

tions to remove bottlenecks.

TDRO draft to be introduced in parlia-

ment this year

The government will propose a draft of Trade Dis-

pute Resolution Organization (TDRO) in parlia-

ment this year. The law is designed to provide ad-

ministrative and adjudicating powers to TDRO for

effective resolution of international import and

export complaints and disputes. This proposed

law is expected to bridge the trust deficit between

local and foreign businessmen and create a linkage

with the international trade dispute resolution or-

ganizations. The re-

gime would efficiently

investigate and resolve

trade disputes to pro-

mote trade, protect trading interests and improve

Pakistan`s standing internationally. Several struc-

tural and regulatory changes had been brought by

Ministry of Commerce to help boost trade and cut

the number of disputes. The act establishes a func-

tionally autonomous body called the TDRO which

will provide services for capacity-building, training

and consultation to promote best practices in inter-

national trade.

Cut-off yields on treasury bills slightly

slashed

The government raised Rs.198 billion which is

much less than the auction target of Rs.250 billion.

The cut-off yield on the three-month T-bills was cut

to 6.21% from 6.25%, six-month to 6.22% from

6.26% and 12-months to 6.24% from 6.27%. The

banks invested the highest amount of Rs.169 billion

in the 12-month papers. They offered bids of

Rs.325 billion in view of the stable interest rate sce-

nario. The government is still relying heavily on

borrowings from the scheduled banks which have

created a liquidity gap of about Rs.1.3 trillion. SBP

said that banks have invested 85% of their liquidity

in the government papers. It also stated that the

amount of loans to private sector increased but

most of the loans were given for working capital.

Banks have been avoiding extending long-term pro-

ject loans to the private sector.



Business and Economic Newsflash

Domestic Newsfeed

Page Page 11 Page Page 10 ICM

Supervision of Rating Agencies

The European Court of Auditors stated that the rat-

ing agencies which came under the fire during the

financial crisis still need to be better supervised.

The European Securities and Markets Authority’s

supervision was not fully effective and there is still

room for improvement in the supervision of credit

ratings agencies. Cumbersome registration proce-

dures and central bank hurdles are making it hard-

er for smaller credit ratings agencies to compete as

the Euro system only accept ratings issued by four

of the 23 agencies. This has created a two-tier mar-

ket structure due to which small agencies are in an

unfavorable situation.

Light in US Financial Markets

After the flash crash, SEC proposed a solution to

record all the activity in the stock and options mar-

kets, and have the data available for analysis. The

project is complex, but not mainly because it re-

quires the processing of 58 billion records per day

but because of the number of different organiza-

tions with a stake in the outcome. The SEC appears

to be moving in the right direction. The final plan

will be approved this year after which the actual

building of the system can begin. By the most opti-

Issued for FEBRUARY, 2016 Issued for FEBRUARY, 2016 Issued for FEBRUARY, 2016

Monthly

Review

KIBOR (6 Months) Foreign Exchange Rates PSX Gold Crude Oil

Bid % Offer % GBP(£) EURO(€) USD($) 100 Index 10 Grams (PKR) (WTI)

Beginning 6.10 6.35 Rs.149 Rs.114 Rs.104 31,290 Rs.39,171 31.70

Ending 6.11 6.36 Rs.145.04 Rs.114.09 Rs.104.67 31,369.51 Rs.41,228 32.70

Change +0.01 +0.01 -3.96 +0.09 +0.67 +79.51 +2,057 +1.00

Markets in Review

mistic timeline, the

system won`t be up and

running until late 2019.

Even when complete, it won`t cover futures and

government bonds, which will require the coopera-

tion of the Commodity Futures Trading Commis-

sion and the Treasury Department.

EU proposals give UK more autonomy on

financial rules

European Council President presented several pro-

posals ahead of a referendum in Britain on its mem-

bership of the EU. The politically sensitive issue of

financial rulemaking was addressed in one of the

proposals. According to the proposal, the substan-

tive EU law, including capital requirements for

banks and other rules for ensuring financial stabil-

ity may need to be formulated in a more uniform

manner by the ECB than by regulators outside the

banking union. The proposal also included that UK

could gold-plate its capital adequacy standards by

adopting higher capital requirements for UK banks.

The proposal formally prohibited discrimination

against firms based on currency. It supported the

Bank of England when it comes to dealing with col-

lapsing lenders or introducing extra capital require-

ments to cool credit supply.

Business and Economic Newsflash

International Newsfeed

ICM

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